ITAT Delhi Quashes Reassessment Against Chanel India, Deletes ₹3.08 Crore Transfer Pricing Adjustment

The Income Tax Appellate Tribunal (ITAT) Delhi has recently granted relief to luxury fashion brand Chanel's Indian arm, quashing reassessment proceedings initiated against Chanel (India) Private Limited beyond four years. It also deleted a ₹3.08 crore transfer pricing adjustment. It also deleted a ₹3.08 crore transfer pricing adjustment.

The tribunal held that the subsidy received from its associated enterprise formed part of the company's operating income because it directly compensated its unabsorbed distribution costs.

A bench of Judicial Member Vimal Kumar and Accountant Member S. Rifaur Rahman observed:

"After considering the entire facts on record, in our view, the AO had not established that there is failure on the part of the assessee to disclose fully and truly all material facts necessary for making assessment particularly the case was reopened after expiry of the 4 years. Hence, the assessment reopened is beyond jurisdiction and we only infer that it is out of change of opinion."

Chanel India distributes high-end fashion and beauty products in India. During the relevant assessment year, it entered into international transactions with its associated enterprise. These included the purchase of traded goods and the receipt of subsidy.

The company benchmarked these closely linked transactions together under the Transactional Net Margin Method (TNMM). It treated the subsidy as operating income, contending that it compensated unabsorbed costs incurred in its distribution business.

The original transfer pricing assessment accepted this approach. More than four years later, however, the Assessing Officer reopened the assessment under Section 147. The officer excluded the subsidy from operating income. It adopted a segregated benchmarking approach and made a transfer pricing adjustment of ₹3.08 crore.

Before the tribunal, Chanel India argued that it had fully disclosed all material facts relating to the subsidy during the original assessment. It relied on its Form 3CEB, transfer pricing study, distribution agreement, and other submissions. The company also contended that the subsidy was not a one-time payment. Rather, it was a recurring compensation mechanism under the distribution agreement to ensure that the distributor earned an arm's length level of profitability.

Accepting these submissions, the tribunal noted that the subsidy was paid under the distribution agreement to compensate the distributor for unabsorbed costs. It was not a one-time or exceptional payment. The tribunal also noted that the Revenue had accepted the same treatment in the preceding assessment year. It further observed that the subsidy had been disclosed in the financial statements as "other operating revenue."

On merits, the tribunal held that the subsidy had a direct nexus with Chanel India's distribution business. It therefore could not be treated as non-operating income while benchmarking its transfer pricing transactions. Referring to earlier decisions, the tribunal noted that support payments received from an associated enterprise to compensate losses are operating in nature. It said such payments should be considered while benchmarking transfer pricing transactions.

The tribunal further observed, " In our view, when it is compensated on the basis of performance of sales, it can only be operating income, it cannot be treated as non-operating income. Further, we observed that in the case of Nalco Water India Ltd (supra) and MSD Pharmaceutical P Ltd (supra)wherein it has been held that subsidy/support payments from AE to compensate losses are operating in nature and must be considered while benchmarking.Therefore, in the given case, the subsidy received by the assessee is only to compensate for the unabsorbed expenditure, it has direct nexus with the distribution activities, therefore, in our view, the treatment of the above subsidy from the AE is part of the operation and treatment given by the assessee in their books of account is proper"

Accordingly, the tribunal held that the reassessment proceedings were without jurisdiction. It deleted the ₹3.08 crore transfer pricing adjustment and allowed Chanel India's appeal

For Assessee: Advocate Vishal Kalra, Ankit Sahni,Taranjeet Kaur, AR.

For Revenue: Advocate Shaveta Nakra Datta, CIT-DR